For Home Depot’s earnings — well, it’s complicated

Opinion: The retailer can’t be expected to channel the entire U.S. economy

By

MarekFuchs

Columnist

Bloomberg

Home Depot is a bellwether for housing, which, in turn, is a gauge of consumer sentiment and, ultimately, the economy.

With the economy either wrapped in clover or caked in mud, all eyes on Tuesday will fall upon Home Depot, which reports first-quarter earnings.

The largest home-improvement retailer this side of Pluto is, at least in certain circumstances, an indicator for housing. Housing, in turn, can be viewed as a sentiment gauge for consumer spending. And consumer spending accounts for most of the U.S. economy.

So, by the transitive property of simplistic thought, Home Depot
HD, +0.10%
will give us an answer to the economy’s paradoxical, contradictory direction, right?

Only “in extremis.”

That’s right: The economy has been a tough cookie to figure out, and Home Depot might help us along, but only “in extremis.”

For those of you who never suffered through sophomore-year Latin, “in extremis” means “in extreme circumstances.” Extreme: you know, big time. What is the “big time” when it comes to earnings? It’s not a penny or two. If you want to even begin pulling a thread of larger economic thought out of Home Depot’s earnings, you need higher standards than that. We’re talking a beat or miss of a nickel — and we’ll tell you why.

The media, of course, will skirt such standards. Even with the economy in such a questionable state, they will imbibe in the thought that a penny or two in a showcase consumer stock like Home Depot means everything, framing Home Depot as a “barometer” or “bellwether” — everything but a “bellhop” there to show you the economic way.

Problem is, you need a nickel to surmount complexities. Never mind that any earnings beat or miss on the order of a penny says more about a company’s ability to finesse or fail Wall Street than serve as an emblem of an entire interdependent world economy. Home Depot has done relatively well during bad times and bad during good. The nickel opens up discussions that it isn’t just bucking a trend; it is in the hold of one.

Moreover, earnings themselves are complicated. A nickel, to be certain, offers no assurances. But at least you can start the conversation. During Home Depot’s fourth quarter, for example, the company appeared to beat on the top line, but missed on earnings. That usually means the company is wringing costs out of a shrinking business in a troubled economy.

But here the previous year’s fourth quarter had an extra week. A nickel guarantees nothing, of course, but does cover many strange circumstances. If it misses or beats by a nickel: OK, perhaps something significant and real and larger is going on here. For a nickel, too, you can trust the stock market’s reaction. Less than that might just mean stock-market excitement about, say, a penny beat and the buyback update, but be misinterpreted as something larger about the economy. A nickel makes it more likely that a larger reaction is directly related to a legitimate sense that the economy has turned.

Remember: The media likes nothing more than to call a turn in the economy, whichever way. It makes earnings stories bigger. But that’s why they’ve called 1,423 of the past two economic turns.

So in the run-up to Tuesday morning’s release, let’s do the math.

Analyst consensus stands at 99 cents per share, according to Thomson Reuters, a 19% increase from a year earlier. Revenue, they say, is due to rise to nearly $20 billion, up 4%.

Do not even entertain the media’s shouts to the skies about how the earnings signify that the economy is unmoored or on-the-make with a penny or two beat or miss. Unless Home Depot comes in at a level below 94 cents or above $1.04, when you hear those claims, your guiding principle should be “caveat emptor.” That’s Latin for “buyer beware.”

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